Unexplained Sundry Credits Taxable u/s 68, Not Eligible for 80-IB Income Tax Deduction: Madras HC Dismisses Appeal [Read Order]

In a recent ruling, the Madras High Court held that unexplained sundry credits are taxable under Section 68 of the Income Tax Act and are not eligible for deduction under Section 80-IB and dismissed the appeal filed by the assessee.

AKR Poly Industries, a firm engaged in manufacturing disposable plastic cups, filed its return declaring nil income and claimed deduction under Section 80-IA. During assessment, the Assessing Officer accepted the eligibility for deduction but found that the assessee had shown sundry creditors amounting to about Rs. 30.17 lakh without furnishing complete details such as names, addresses, and confirmations.

The Assessing Officer treated a sum of Rs. 16,42,093 as unexplained credit under Section 68 and assessed it as income from other sources. The assessee challenged this before the Commissioner of Income Tax (Appeals), who partly accepted the explanation and treated a portion as explained, while holding the remaining amount as business income and allowing deduction under Section 80-IB.

The Revenue appealed before the Tribunal, which held that unexplained credits cannot be treated as business income and restored the Assessing Officer’s order. Aggrieved by this, the assessee approached the High Court.

The assessee’s counsel argued that the sundry creditors represented advances received from customers in the ordinary course of business and had a direct nexus with business activity. They argued that such receipts should be treated as business income and eligible for deduction under Section 80-IB.

The revenue counsel argued that the assessee failed to establish the identity, creditworthiness, and genuineness of the creditors. The counsel argued that in the absence of proper evidence, the credits must be treated as unexplained under Section 68 and cannot be linked to business income.

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The Division Bench comprising Justice G. Jayachandran and Justice Shamim Ahmed observed that the assessee failed to satisfactorily explain the source and identity of the creditors. The court observed that only a portion of the credits was explained and the remaining amount remained unverified.

The court explained that under Section 68, if the assessee fails to offer a satisfactory explanation regarding the nature and source of credits, such amount is liable to be taxed as income. It pointed out that the assessee had not declared the credits under any of the recognised heads of income and had not established any nexus with business activity.

The court held that unexplained credits cannot be treated as business income and are not eligible for deduction under Section 80-IB. The appeal filed by the assessee was dismissed.

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